The Straight-Line Depreciation is Wanted, Dead or Alive
We propose a simple axiomatic system that any depreciation methodÂ¡Âªcomplying with the core of the accounting of depreciationÂ¡Âªmust obey. We show that, while none of the prevalent depreciation methods (e.g., straight-line) ex ante conforms to these principles, the accredited proportional depreciation method not only maintains the axiomatic system, but also, for a plausible family of depreciation methods, is the unique method that complies with the axiomatic system. We further propose two consistency requirements of a depreciation methodÂ¡Âªpartition consistency and dynamic consistencyÂ¡Âªand show that, in contrast to the commonly used methods, the proportional depreciation method is the only one to always sustain both. Our analysis may provide further resolution to the arguable evidence on the dominance of Funds From Operations over net income in measuring performance in the real estate industry.
Volume (Year): 31 (2009)
Issue (Month): 3 ()
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References listed on IDEAS
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- Jeffrey D. Fisher & Brent C Smith & Jerrold J. Stern & R. Brian Webb, 2005. "Analysis of Economic Depreciation for Multi-Family Property," Journal of Real Estate Research, American Real Estate Society, vol. 27(4), pages 355-370.
- Hugh O. Nourse, 1994. "Measuring Business Real Property Performance," Journal of Real Estate Research, American Real Estate Society, vol. 9(4), pages 431-444.
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